Fi­nan­cial Night­mare

The bank­ing sec­tor in Bangladesh is in the midst of a cri­sis be­cause a re­cent amend­ment in the coun­try’s bank­ing laws is deemed as a move by the rul­ing party to favour its po­lit­i­cal sup­port­ers.

Re­cent de­vel­op­ments in the bank­ing laws of Bangladesh could spell more trou­ble.

“Reg­u­la­tion is nec­es­sary, par­tic­u­larly in a sec­tor like the bank­ing sec­tor, which ex­poses coun­tries and peo­ple to a risk”— Chris­tine La­garde, Man­ag­ing Di­rec­tor, IMF.

“This [Bank­ing Com­pa­nies (Amend­ment) Act 2017] is def­i­nitely not de­sir­able for good gov­er­nance in the bank­ing sec­tor. I think the gov­ern­ment has sur­ren­dered to the pres­sure ex­erted by the busi­ness lobby. Other than this, I don't find any jus­ti­fi­ca­tion.”

—Mirza Az­izul Is­lam, a for­mer ad­vi­sor to a care­taker gov­ern­ment in

Bangladesh. Al­though the his­tory of bank­ing dates back to the early and me­dieval eras, the mod­ern sys­tem emerged with the estab­lish­ment of the Bank of Eng­land in 1695. From the ini­tial stage of cash/ debt han­dling on hand-writ­ten notes to cheques and ex­pan­sion of work cov­er­ing clear­ing fa­cil­i­ties, se­cu­rity in­vest­ments, etc., bank­ing has emerged as one of the most com­plex and fi­nan­cially vi­able eco­nomic sec­tors.

Ac­cord­ing to a source, there ex­ist 59 banks that are among the largest in the world. A well-de­vel­oped bank­ing sys­tem is in­dis­pens­able for mod­ern trade and com­merce. In to­day’s world, banks not only act as cus­to­di­ans of pub­lic money but are also vi­tal agents for main­te­nance of a sound fi­nan­cial po­si­tion of a coun­try. Con­se­quently, reg­u­la­tions are in op­er­a­tion to check, among other things, mal­prac­tices, mo­nop­o­lis­tic trends and gen­er­ally ac­cepted mer­can­tile tra­di­tions. These laws and rules have evolved with the pas­sage of time in ac­cor­dance with the needs of a rapidly chang­ing tech­no­log­i­cal world. How­ever, pro­vi­sions re­lated to pub­lic in­ter­est have more or less re­mained con­sis­tent.

Bangladesh be­came in­de­pen­dent in 1971 and falls in the cat­e­gory of de­vel­op­ing coun­tries where the bank­ing sec­tor plays a key role in the eco­nomic de­vel­op­ment of the coun­try. The first step in this di­rec­tion was na­tion­al­iza­tion of the ex­ist­ing seven banks. The main ob­jec­tives were to al­low the poor ac­cess to funds, re­duce cap­i­tal flight to for­eign coun­tries and in­crease do­mes­tic in­vest­ment but, by 1976, the gov­ern­ment re­al­ized that these banks were un­able to pur­sue the poli­cies laid down by the gov­ern­ment. In view of the pa­thetic per­for­mance of the na­tion­al­ized banks, the pri­vate sec­tor was in­vited to take on this re­spon­si­bil­ity and im­prove the fall­ing fi­nan­cial po­si­tion of the coun­try.

Right now 42 pri­vate com­mer­cial banks and around 11 for­eign banks, in ad­di­tion to a num­ber of non-sched­uled banks and fi­nan­cial in­sti­tu­tions, are op­er­at­ing in Bangladesh. This proves how well-embed­ded is the com­pet­i­tive mar­ket in Bangladesh as far as the bank­ing in­dus­try is con­cerned. There can be no two opin­ions that the gov­ern­ment needs to have strict reg­u­la­tions to main­tain con­trol and eq­uity over such a large eco­nomic zone. At the same time, de­spite strin­gent rules, the gov­ern­ment heav­ily re­lies on this sec­tor to meet its bud­getary re­quire­ments and can­not af­ford to alien­ate its sup­port. The gov­ern­ment has to of­fer a few car­rots as use of merely the stick might cause sub­stan­tial loss in terms of fi­nan­cial sta­bil­ity. As a re­sult, the con­tro­ver­sial Bank­ing Com­pa­nies (Amend­ment) Act 2017 was passed by the par­lia­ment. This came in the wake of a long-stand­ing de­mand by the pri­vate bank own­ers.

The amend­ment aims at al­low­ing four mem­bers, in­stead of two, of the same fam­ily to be on the board of a com­mer­cial bank. The law also lets di­rec­tors of a com­mer­cial bank to serve three con­sec­u­tive terms of three years each (mean­ing nine years in all) which

was ear­lier two terms. They would be able to re­claim the post af­ter a break of three years. This amend­ment, has come at a time when bank di­rec­tors have been al­legedly found in­volved in ir­reg­u­lar­i­ties in is­suance of loans to du­bi­ous com­pa­nies, re­sult­ing in loan de­faults and caus­ing sig­nif­i­cant fi­nan­cial losses. Most of the banks in the coun­try are now suf­fer­ing on ac­count of de­fault loans that have gone up by three times over a nine-year pe­riod. The bank­ing sec­tor’s non-per­form­ing loans (NPL) ra­tio was 9.23 per cent at the end of 2016 and 10.67 as of Septem­ber 2017.

The op­po­si­tion, ex­perts and mem­bers of civil so­ci­ety have been rais­ing strong voices against this amend­ment, ex­press­ing the fol­low­ing ap­pre­hen­sions: • Fam­ily con­trol over pri­vate com­mer­cial banks would be es­tab­lished • De­pos­i­tors’ in­ter­ests could be at stake with pos­si­bil­ity of im­por­tant de­ci­sions be­ing more fam­ily-ori­ented rather than in pub­lic in­ter­est. • Cul­ture of loan de­fault would be detri­men­tal for the de­pos­i­tors in gen­eral as it would re­sult in a low rate of in­ter­est. It would be detri­men­tal for the coun­try in par­tic­u­lar. The gov­ern­ment’s loos­en­ing con­trol over the work­ing of banks and forc­ing Bangladesh Bank for is­suance of new bank­ing li­cences to pri­vate par­ties which were ear­lier turned down for lack of fi­nan­cial health, might be dam­ag­ing to the bank­ing in­dus­try in gen­eral. Much con­sid­er­a­tion ought to be given be­fore mak­ing cru­cial de­ci­sions for the bank­ing in­dus­try oth­er­wise it would be dif­fi­cult to in­voke fi­nan­cial dis­ci­pline in the bank­ing sec­tor and this could prove to be a bad omen for the na­tional econ­omy.